The Pensions Regulator gives another helping hand for meeting new climate change duties

The Pensions Regulator has published a step-by-step example showing how the trustees of the "XYZ pension scheme" go about meeting their climate change risk governance and reporting duties under the Pension Schemes Act 2021.

The example is in the form of an appendix to the regulator's recent guidance. It is not meant to be used as a checklist: trustees will need to adopt processes that are appropriate for their scheme. But it does suggest a process trustees might follow, and actions they might take.

Which schemes do the new duties apply to? 

The climate change governance and reporting requirements introduced under the Pension Schemes Act 2021 started to apply to schemes with assets of £5 billion or more and authorised master trusts in October 2021. They will apply to schemes with assets of £1 billion or more from 1 October 2022. (You can read more about this in our Insight)

At the moment, there is no indication of when the requirements might start to apply to smaller schemes, other than that the Department for Work and Pensions (DWP) is going to review the position in 2023. However, the trustees of smaller schemes already have some duties in this area and the regulator has confirmed that "[t]hose running schemes out of scope of the rules but who want to do more to manage climate-related risks and opportunities may… find .. our new example .. helpful".

The example approaches climate change as "a systemic risk that poses a material financial risk to the scheme, the sponsor and the investments held".

What do the trustees do?

The "XYZ pension scheme" has both defined benefit and defined contribution sections.

In the example, the first thing the trustees do is arrange a series of training workshops. The first workshop covers topics the trustees need to understand to get started. These include:

• their legal obligations, and how these fit with their fiduciary duties;
• "how their current investment beliefs might inform their approach to climate-related matters and how and why those investment beliefs might need to be further developed";
• examples of climate-related risks and opportunities;
• "how trustees or their service providers should engage with the companies and funds that they own in relation to climate-related issues";
• whether adopting a net-zero target might be appropriate, how it might be achieved and implications. 

The next sections explain the steps the fictitious trustees go on to complete, with the help of their advisers, in order to make changes to "their governance framework, their arrangements with scheme service providers, implementation aspects of their investment and funding arrangements [and] the detail of their risk monitoring arrangements". These include:

• asking advisers to say how they expect the different sections of the scheme to develop in the future, and over what time periods – and what this means for investment and for reliance on employer covenant;
• asking their advisers to help them to understand what climate-related data for investments is available (and how this could be improved), and to what extent it is likely to be possible to analyse climate-related risks for different asset classes and holdings;
• delegating to an investment sub-committee (ISC) responsibility for taking the lead on developing proposals to address the new requirements (and updating their terms of reference);
• asking the ISC to update the trustees' climate-related investment beliefs and suggest a new climate change policy to reference in the statement of investment principles;
• making a number of other changes to their governance framework, including updating the scheme's risk register, developing a climate risk dashboard, making changes to the criteria for selecting investment service providers or insurers, and regularly engaging with the scheme employer to "understand how they are addressing climate-related issues relevant to their business and how [their] ability to support the scheme might be affected by climate-related issues in the future";
• reviewing the capabilities of, and engaging with, current providers of investment management and/or fiduciary management services; and
• asking questions of – and updating the objectives and reporting requirements for, and their contract with – their investment, actuarial and covenant advisers.

The example then suggests practical steps in the areas of scenario analysis, metrics and setting targets. In each area, the trustees follow a similar process of understanding the requirements, discussing with their advisers what scheme-specific steps could be taken to meet them, and deciding what to do. 

Osborne Clarke comment

The regulator's guidance and this new illustrative example should be read with the guidance published by the DWP and the guidance published by the pensions climate risk industry group. 

Schemes that are already in scope of the Act's requirements (schemes with assets of £5 billion or more and authorised master trusts) and schemes that will come into scope later this year (those with assets of £1 billion or more) should consider the example with their advisers now. 

Schemes not yet in scope of the Act might like to discuss with their advisers whether there are elements they could apply now in order to enhance their compliance with existing legal obligations and do more to manage climate-related risks and opportunities.

You might also like to listen to our Pensions 22 podcast on Decarbonisation and ESG, where we look at the duties of trustees in this important area.

Osborne Clarke's pensions and cross-disciplinary decarbonisation teams are helping our clients to understand what they need to do to prepare for climate change-related requirements, along with the wider regulatory, legal and business challenges that decarbonisation brings. Please contact one of the experts below, or your usual Osborne Clarke contact, to discuss how we can help your business.